Comptroller Dugan Calls Community National Banks Vital to U.S. Economy and a Mainstay of the OCC Mission

HONOLULU — Comptroller of the Currency John C. Dugan said today that while community banks are a linchpin of the U.S. economy, they face formidable competition, and it is vital they be allowed to compete on a level playing field without being shackled by unnecessary regulation.

In a speech to the Independent Community Bankers of America, the Comptroller noted the issue is important to him because more than 90 percent of the banks supervised by the Office of the Comptroller of the Currency are community institutions. "Oversight of community banks is a mainstay of the mission of the OCC," he said.

An example of a "tilt" in the playing field can be seen with Industrial Loan Companies, or ILCs. Although ILCs are insured depository companies, their parents are not subject to the same regulation as bank holding companies. As a member of the Federal Deposit Insurance Corporation's Board of Directors, Comptroller Dugan added, he voted to extend a moratorium on commercially-owned ILCs because he believes Congress should "revisit the level playing field issue regarding regulation of ILCs and their holding companies."

Competitive issues make it all the more important that regulators look for ways to apply less burden on smaller, less complex institutions where that approach makes sense, and the OCC has done that, he said.

"In 2001, we introduced a 'pilot' program that increased the single borrower lending limit for well-capitalized and well-managed national banks in connection with specified types of loans," Mr. Dugan said. "I am pleased to report that this pilot has been implemented by community bankers without raising significant supervisory concerns."

The OCC will review the pilot program this summer and decide whether the current features of the program should be made permanent, he said. Separately, the OCC will consider whether to provide enhanced flexibility for any broader range of types of loans that are both typical of the community banking business and typically conducted without notable supervisory concerns.

The Comptroller noted that the OCC has a strong presence in communities across the country. "Some people seem to have the impression that the OCC emanates solely from Washington," he said. "Well, how many of you know that we have 68 supervisory offices around the country, in communities such as Billings, Montana; Longview, Texas; Salina, Kansas; Iron Mountain, Michigan; and Peoria, Illinois? Or that 95 percent of all supervisory decisions are made at those locations by local staff tied into local communities?

"The truth is that OCC has almost 1,400 examiners out there who live, shop, vote, raise families, and have a personal interest in the economy of their state and region," he added.

One example of the importance of the OCC's local presence was the agency's response to signs that bank auditors were taking a harder line on loan loss reserves. Loan loss reserves are a crucial component of solid bank risk management and a foundation of a safe and sound banking system. Consequently, the OCC responded to this development on a number of fronts.

"At the local level, we have made clear that we would intervene with an outside auditor in cases where that auditor was inappropriately trying to substitute its judgment for a bank's in determining reserve adequacy," he said. The OCC has worked on this issue with a number of federal bodies, including the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and the Securities and Exchange Commission.

The Comptroller also noted the OCC welcomes new community bank charters and said he has directed agency staff to undertake a review of why new banks appear to be disproportionately choosing state charters.

While there are many sound reasons for choosing a state charter, "if prospective community national banks are deterred by a false perception that the OCC is only oriented to big banks, then we need to fix that perception," the Comptroller said. "Or if we are setting unreasonably high hurdles with an overly conservative application review process, or if we simply are not as responsive as our counterparts in the states, then I want to fix that, too."

"Community banking is fundamental to our mission," Comptroller Dugan said in concluding his speech. "We appreciate the many challenges community bankers face today; and the resources and the expertise of the OCC are committed to support you—community bankers—in conducting a safe, and sound, and successful banking business."